A REBALANCING ACT IN EMERGING EUROPE AND CENTRAL ASIA April 17, 2015 Spring Meetings
A Rebalancing Act in Emerging Europe and Central Asia ECA is expected to be the slowest growing region worldwide with almost no growth forecast for 2015 Stable to moderately improving outlook in western part of region is being offset by the direct and indirect impact of the oil shock and uncertainty in the eastern part of the region The poor are hard hit by the oil shock due to the sharp decline in real spending power from weaker output, reduced remittances, as well as the lower terms of trade Bottom-line: Countries that are performing the rebalancing act to lower oil prices and changing exchange rates can benefit from new opportunities in the tradables sectors, but ongoing reforms to improve the business climate as well as prudent macro and financial sector policies are also key. 1
Economic Growth in ECA remains weakest among developing regions 2015 8.0 7.0 GDP Growth (%), weighted average by region 7.2 7.0 6.9 6.7 6.8 6.3 6.0 5.0 4.0 4.2 4.5 4.0 2013 2014e 3.0 2.0 2.5 2.2 1.8 2.0 2.2 2015p 1.0 0.9 0.6 0.6 0.0 Latin America & Caribbean 0.1 Europe & Central Asia Middle East & N. Africa East Asia & Pacific Sub-Saharan Africa South Asia 2 Source: World Bank
Croatia Bulgaria Slovenia Hungary Czech Republic Slovak Republic Romania Poland FYR Macedonia Montenegro Kosovo Albania Bosnia and Herzegovina Serbia Turkey Turkmenistan Uzbekistan Tajikistan Georgia Kyrgyz Republic Azerbaijan Kazakhstan Armenia Moldova Belarus Russia Ukraine While overall ECA growth prospects are much lower in 2015 than last year, expectations are dramatically different across the region 12.0 10.0 8.0 Average weighted growth in 2015: 1.1% 2014 and 2015 Real GDP Growth Average weighted growth in 2015: -2.8% 6.0 4.0 2.0 0.0-2.0-4.0-6.0-8.0 EU-Central and South Eastern Europe Western Balkans Turkey Eastern Europe, S. Caucasus, Central Asia and Russia 2014 2015 (April 2015 Projection) 3 Source: World Bank
Drilling-down into ECA Trends Outlook: Stable to moderately improving growth in western part of region, but concerns remain The direct and indirect impact of the oil shock and uncertainty in the eastern part of the region are hitting the poor hard Bottom line: Countries that are performing the rebalancing act to lower oil prices and changing exchange rates can benefit from new opportunities in the tradables sectors, but ongoing reforms to improve the business climate as well as prudent macro and financial sector policies are also key. 4
Stable to moderately improving growth in western part of region ECA countries close to Eurozone are benefiting from: Monetary policy easing (QE) in Europe with lower interest rates Depreciating currencies, boosting demand for import competing sectors and exports Lower cost of energy To date, limited spill-over from uncertainty in Greece and Ukraine 5
Yield in % Lower interest rates are a boost to ECA countries with close ties to the Eurozone 1.2 1 Eurozone Yield Curve 0.8 0.6 0.4 0.2 0-0.2 1yr 2yr 5yr 10yr -0.4 September, 2014 April, 2015 6 Source: European Central Bank
Depreciations against the dollar, help exports and lower demand for imports 30% Depreciation of national currencies vis-a-vis the USD (April 2014-April 2015) 25% 20% 15% 10% 5% 0% 7 Source: Bloomberg
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Along with lower oil prices, there are tentative signs that Eurozone confidence is picking up 110.0 EU Economic Sentiment Indicator (long-term average =100) 105.0 100.0 95.0 90.0 85.0 80.0 Note: Index based on monthly harmonized surveys of the industry, the services, retail trade and construction sectors, as well as to consumers within the EU member states. 8 Source: European Commission
With modest growth in industrial production 101 European Union (28 countries) 100 99 98 97 96 95 9 Source: Eurostat
14-Apr-14 21-Apr-14 28-Apr-14 5-May-14 12-May-14 19-May-14 26-May-14 2-Jun-14 9-Jun-14 16-Jun-14 23-Jun-14 30-Jun-14 7-Jul-14 14-Jul-14 21-Jul-14 28-Jul-14 4-Aug-14 11-Aug-14 18-Aug-14 25-Aug-14 1-Sep-14 8-Sep-14 15-Sep-14 22-Sep-14 29-Sep-14 6-Oct-14 13-Oct-14 20-Oct-14 27-Oct-14 3-Nov-14 10-Nov-14 17-Nov-14 24-Nov-14 1-Dec-14 8-Dec-14 15-Dec-14 22-Dec-14 29-Dec-14 5-Jan-15 12-Jan-15 19-Jan-15 26-Jan-15 2-Feb-15 9-Feb-15 16-Feb-15 23-Feb-15 2-Mar-15 9-Mar-15 16-Mar-15 23-Mar-15 30-Mar-15 6-Apr-15 13-Apr-15 Limited spill-over in country risks from the uncertainty in Greece and Ukraine 30 25 20 15 10 5 Country Risk (Credit Default Swaps,10Yr Sovereign Spreads, %) 180 160 140 120 100 80 60 40 20 0 0 Greece Russia Portugal Spain Turkey Ukraine (right axis) 10 Source: Bloomberg
.but concerns remain Labor markets have a long way to recover, especially youth employment ECA average youth unemployment greater than 25% compared to about 13% for the rest of developing world Uncertainties linger on fundamental structural policies while the debt overhang still stifles growth Non performing loans in ECA nearly 10% (W. Balkans 16.4%), other regions average between 2% to 6%. Gross capital flows remain weak 11
Private capital flows remain weak, particularly for regions hit by oil shock 14000 Average Monthly Gross Capital Flows by Subregion 12000 10000 8000 6000 4000 2000 0 2010 2011 2012 2013 2014 2015* South Caucasus Central Asia EU-Central and South East Europe Ukraine Russia Turkey 12 * Average monthly flows for January and February 2015. Source: World Bank
The direct and indirect impact of the oil shock and uncertainty in the eastern part of the region are hitting the poor hard Countries highly dependent on oil exports, or on trade and remittances from oil exporting countries, are seeing a sharp decline in income Starting in the early 2000s, oil revenues, remittances, and capital inflows had boosted domestic demand and raised costs of production The reversal of these trends has come fast and hit income hard, and this is particularly concerning for the poor 13
The oil price shock has had a much stronger adverse impact on buying power than what is reflected by GDP alone, through remittances and changes in export and import prices 4 2 0-2 -4-6 -8-10 -12-14 Impact on Income from GDP Growth and the Terms of Trade (ToT) Shock (2015) 1.5 1.3-12.27-12.73 ToT GDP -3.8-7.2 Azerbaijan Kazakhstan Russia 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0-6.0-8.0-10.0 Impact on Income From GDP Growth and Decline in Wage Remittances (2015) 0.8 1.5-0.4-0.1-4.1-3.5 GDP 2.0 1.3 1.7 0.0-1.3 Change in remittances, % of GDP -5.1-4.7-2.0-0.8-6.5 7.6-4.1 14 Source: World Bank
The region experienced large real currency appreciations prior to the global crisis 15
16 Which have largely been reversed in the last year with falling oil prices and lower remittances
Remittances represent a large share of GDP in many Eastern European countries and Central Asia and expected declines are large 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 2013 % change 2014 % change 2015 % change Remittances, % GDP in 2013 48.9 31.6 21.0 14% 15% 21% 12% 11% 24.9 4% 1% 0.2 0.1-2% -1% 0% -9% -12% -18% -18% -23% 17% 15% 11.9-8% -16% -23% -30% Armenia Belarus Kazakhstan Kyrgyz Republic Moldova Tajikistan Uzbekistan 60 50 40 30 20 10 0-10 -20-30 -40 17 Source: World Bank
Number of displaced workers Lower skilled workers from poorer households are more likely to be displaced Russia: Displaced workers by welfare deciles 120,000 100,000 80,000 60,000 40,000 20,000 0 1 2 3 4 5 6 7 8 9 10 Poorer Deciles (consumption per capita) Wealthier Source: Russia Household Budget Survey and micro-simulations 18
In remittance dependent countries, the impact drives some of the middle class and near poor into poverty Kyrgyz Republic: Incidence curve as a result of 50% reduction in remittances Poorer Wealthier Source: Kyrgyz Integrated Household Survey and micro-simulations 19
Oil shock is not cyclical and domestic prices will need to fall relative to foreign prices Oil prices are expected to stay low in the medium-term. The shock is not a temporary blip due to reduced demand Many oil exporters have allowed the nominal exchange rate to make the needed adjustment in real domestic prices and this will allow them to benefit from the new opportunities in tradable sectors. 20
Real Exchange Rate vis-à-vis Dollar (2003=100) Real Oil Price (2003=100) Many oil exporters have allowed exchange rates to make the adjustment in the real domestic relative prices as oil prices have fallen 250 Oil and Relative Prices 400 350 200 300 150 250 200 100 150 50 Oil Prices 100 50 0 0 Russia Kazakhstan Azerbaijan Average Oil Price (right axis) 21 Source: World Bank
Countries that are performing the rebalancing act to lower oil prices and changing exchange rates are expected to benefit from new opportunities To seize the new opportunities in tradable sectors, allowing prices to adjust will help competitive sectors to grow and others to contract Ongoing reforms to improve the business climate as well as prudent financial sector and macro management in dollarized economies. Adjustments to lower oil prices are painful, but postponement can be very costly and may backfire 22
Oil shock triggers sectoral adjustments toward some sectors and away from others 1.5 Russia: Employment change as % of total employment 1.0 0.5 0.0-0.5-1.0-1.5 Source: Global Trade Analysis Project and Russia Statistics Office data, and CGE simulation results 23
Dollarization is high in some countries so authorities would want to monitor risks in the banking sector 80 Foreign currency deposits as a share of total deposits 70 60 50 40 30 20 10 0 Azerbaijan Armenia Kazakhstan Georgia 2014 Jan-15 Feb-15 Source: Central banks of Armenia, Azerbaijan, Georgia, and Kazakhstan. 24
Summary Stable to moderately improving growth in western part of region, but concerns remain Direct and indirect impact of the oil shock and uncertainty in the eastern part of the region are hitting incomes hard and raising concerns for poverty Countries that are performing the rebalancing act to lower oil prices and changing exchange rates are expected to seize new opportunities in the tradables sectors, but ongoing reforms to improve the business climate as well as prudent macro and financial sector policies are also key. 25
26 Thank you!